LES FRONTIERES DE L’ENTREPRISE

Dans votre présentation du cas, vous vous focaliserez sur la question de la délocalisation de la production des produits de luxe et vous essaierez d’aborder et de répondre aux questions suivantes :

1. La problématique de l’externalisation est-elle la même quelles que soient les activités considérées ?

2. Quels-sont les principales limites et les principaux avantages de l’externalisation ?

3. Quels types de coûts « cachés » ou difficilement anticipés peuvent voir le jour ?

4. Quelles-sont les précautions à prendre lors d’une stratégie d’externalisation ?

JUILLET-AOÛT 2002 • ASSOCIATION DU GROUPE HEC 31

Galaxie HEC En couverture Dossier Groupe HEC Métiers Travelling Votre carrière Management A travers le monde ActualitésAssociation

LES NOUVELLES RÈGLES DE L’EXTERNALISATION

C’est la grande tendance du moment. Mais le transfert d’une partie des activitésde l’entreprise à des prestataires est souvent définitif. Ce qui exige une démarchedes plus rigoureuses et une réflexion sur le moyen terme pour une décisionstratégique d’ampleur.

Services et externalisation

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Diminution des coûts et efficacité accrueL’aspect financier reste pour les dirigeants lecritère numéro un d’une décision d’externa-lisation. “Il s’agit de réduire le coût d’une fonc-tion en la confiant à des prestataires qui ferontmieux pour moins cher”, explique BertrandQuélin. L’ensemble des coûts fixes et va-riables sont ainsi transférés au prestataire. Alui désormais d’engager les investissementslourds dans un contexte qui peut être de forteobsolescence (informatique et télécoms, notamment), mais attention ! l’entreprise -cliente devra alors s’engager pour longtemps.A lui aussi de payer les salariés et de faire bénéficier ses clients des économies d’échelle.Autre avantage de poids, l’entreprise clientebénéficie de l’expertise du prestataire dansson domaine d’activité. “Le prestataire vientavec une méthode éprouvée, précise PaulTremsal. Les procédures ont été améliorées surchaque chantier, l’organisation est rodée.” Lepersonnel est très qualifié, le matériel à lapointe des technologies. Une situation donc idéale ? Gare aux mira-ges, prévient néanmoins Jérôme Barthélemy(D.00), professeur de stratégie à Audencia –Nantes Ecole de Management, dans un dos-sier sur l’externalisation dans le magazinel’Expansion (juin 2002). “La valeur d’une opé-ration d’externalisation sera amputée par descoûts”, explique l’auteur de Stratégies d’exter-nalisation (Dunod, 2001). Ceux qu’il faut consacrer, avant la signaturedu contrat, à en définir les modalités, à iden-tifier le partenaire, à évaluer sa capacité à répondre au cahier des charges ; et ceux, pen-dant la durée du contrat, destinés à vérifier laprestation, et éventuellement à renégocier.Des sommes qu’il est impératif d’intégrerdans l’évaluation d’une externalisation aurisque de rencontrer assez vite une grosse déception.

Le cœur de métier en ligne de mireJusqu’où doit aller l’externalisation ? Telleest la question que se posent des dirigeantspartagés entre l’idée d’augmenter la valeurajoutée par ce biais et la crainte de toucherau cœur de métier, en réduisant la valeur del’entreprise. “Paradoxe : ce problème arrive en tête des critères d’analyse des dirigeants, explique Bertrand Quélin, mais rares sontceux qui évaluent rationnellement ce périmètrestratégique. L’approche reste souvent subjectiveet instinctive.”“Dans certains cas, il n’y a pas de doute : l’ex-ternalisation n’est pas envisageable car on touchedirectement à ce qui fait la valeur de l’entre-prise”, souligne Frédéric Tcherneian (H.89),DAF de Questel Orbit, leader de l’informa-tion spécialisée en propriété industrielle. Ceprestataire permet à ses clients de protéger etde valoriser par eux-mêmes leurs innova-tions, en leur donnant les moyens de maîtri-ser leur portefeuille de brevets, marques,noms de domaine, grâce à ses outils de recherche et de veille, ainsi qu’à une couver-ture géographique étendue. “Nous sommesun fournisseur d’informations permettant à nosclients de garder le contrôle de cet élément-clé deleur stratégie. En somme, notre succès tient à lanon-externalisation de cette activité”, expliqueen souriant Frédéric Tcherneian. C’est là unautre paradoxe : la tendance croissante àl’externalisation favorise les entreprises pres-tataires de services qui évoluent dans les domaines stratégiques non externalisables.Tout simplement parce que les entreprisesont là besoin d’un renfort permanent.

Une valeur ajoutée en permanente mutationMais identifier là où est le cœur de métier, làoù se concentrera bientôt la valeur ajoutéesuppose de mener un raisonnement à moyenterme sur ce que doit et veut être l’entreprise.“Car on constate, explique Bertrand Quélin,une migration permanente de la valeur ajoutéequi, dans le domaine industriel par exemple, nese cantonne plus au produit et à sa transforma-tion, mais se développe vers toutes les prestationsassociées au produit.” Par exemple, le verrierdans l’industrie automobile constate que savaleur ajoutée migre vers toutes les presta-tions associées à la livraison d’une vitre ar-rière de voiture, jusqu’au contrôle de l’étan-chéité. Aussi voit-on des décisions d’externalisationtoucher aujourd’hui ce qui a été le cœur demétier historique de certains groupes, alorsque la valeur ajoutée a déjà migré vers

Dossier

32 ASSOCIATION DU GROUPE HEC • JUILLET-AOÛT 2002

L ’externalisation a le vent en poupe.Mieux : le mot est à la mode. Mêmes’il est souvent ressenti comme parti-

culièrement... flou ! Toute sous-traitanced’un travail quelconque n’est-elle pas uneforme d’externalisation ? “Pas si l’on s’en tientà une définition précise, dit Bertrand Quélin,professeur au Groupe HEC et l’un des meil-leurs spécialistes du sujet. L’externalisation estle transfert durable d’activités dans lesquellesl’entreprise a investi dans le passé.” Pas deconfusion possible, donc : la sous-traitanceindustrielle en cas de surchauffe d’activité et lerecours à des services extérieurs au coup parcoup n’ont rien à voir avec l’externalisation.Au-delà des traditionnels restauration, jardi-nage, nettoyage et autres gardiennages, cesont aujourd’hui des fonctions stratégiquescomme l’informatique, la logistique ou lafonction financière qui sont de plus en plussouvent confiées à des sociétés externes.Exemple type d’une société prestataire dansle domaine industriel, KS Services. “Dans ledomaine industriel, raconte son président PaulTremsal (I.74), qui, en six ans, a fait passer lechiffre d’affaires de 6 millions de francs à plusde 18,5 millions d’euros, nous assurons trois

types de prestations. Les plus connues relèventdes services tertiaires (accueil, standard, sur-veillance ou nettoyage, mais également la requa-lification de fichiers ou le recouvrement decréances) ; le deuxième type de prestationsconcerne les services logistiques (gestion desstocks, des matières premières, des produits finis), qui tendent aujourd’hui à englober toutela gestion des flux à l’intérieur de l’entreprise etintègrent même les expéditions aux clients ; enfinle troisième est celui des services annexes à laproduction qui, partant de la maintenance, sedéveloppent dans le conditionnement, le contrôlequalité, etc.”Un champ d’activités, on le voit,en pleine expansion.

Services et externalisation

Quand on touche au cœur mêmede la valeur ajoutée, il est inenvisageable

d’externaliser. L’entreprise doit au

contraire chercher à se renforcer.

Frédéric Tcherneian (H.89), DAF de Questel Orbit

!

Les entreprisesont recours à l’externalisation dans les domaines

où elles doiventconstater qu’en interne

elles ont désappris à faire du bon travail.

Paul Tremsal (I.74), président de KS Services

Services et externalisation

d’autres métiers et prestations, à forte domi-nante tertiaire. Dans ce domaine, les groupesles plus novateurs sont ceux qui anticipentsur ce qu’ils seront demain. L’externalisationbien menée est indissociable d’une réflexionstratégique sur le moyen terme.

Gérer les risquesReste que l’importance des risques pris gèlesouvent certaines décisions. Qu’il s’agisse durisque industriel, de celui portant sur l’imagede l’entreprise (en cas de défaillance du pres-tataire vis-à-vis de la marque), ou du risquesocial afférent à toute décision d’externalisa-tion, l’entreprise et ses dirigeants se retrou-vent exposés sans pouvoir maîtriser en direct

une crise éventuelle. “Il n’y a pas de lien de subordination entre l’entreprise cliente et les em-ployés du prestataire, rappelle Paul Tremsal.D’où la nécessité d’avoir un périmètre précis d’in-tervention et une interface permanente – le res-ponsable de site – entre le client et le prestataire.”Autre garde-fou, le contrat. Etabli sur unedurée moyenne de 6 à 7 ans, il prévoit des pé-nalités de plus en plus lourdes en ce quiconcerne les défaillances du prestataire. “Lerisque majeur, commente Jérôme Barthéle-my, réside dans l’existence de coûts anormaux,liés à l’impossibilité de changer de prestataire oude réintégrer une activité externalisée. Dans ce cas, le prestataire peut utiliser sa position deforce pour augmenter ses tarifs ou réduire la qua-lité de ses prestations.” Un scénario-catas-trophe où l’externalisation se traduit alorspar une destruction de valeur !

La nécessité d’une démarche stratégiqueLourde donc de conséquences, de risques etd’enjeux, la décision d’externalisation doitrépondre à une méthodologie rigoureuse.Première étape, délimiter le périmètre straté-gique de l’entreprise, son cœur de métier.Deuxième phase, générer les élémentscomptables et financiers associés aux activi-tés externalisables, permettant analyses etcomparaisons. Troisième phase, rédiger le cahier des charges. Enfin dernière étape,contractualiser. Il arrive que ce travail abou-

34 ASSOCIATION DU GROUPE HEC • JUILLET-AOÛT 2002

Dossier

Il ne faut pas oublier que la relation “entreprise externalisatrice-prestataire” reste avant tout une relationcommerciale dans laquelle les deuxparties cherchent à s’approprier la plus grande partie de la valeur créée par l’externalisation” (l’Expansion - juin 2002)

Jérôme Barthélemy (D.00), Professeur de stratégie

!

tisse... à une réorganisation rendant inutilel’externalisation. “Mais quand le choix de l’externalisation est fait,on demande de plus en plus au prestataire de reprendre l’équipement, de le mettre à niveau,explique Bertrand Quélin. Quant aux trans-ferts de personnes, le volet social est tout à la foisquantitatif – salaires, avantages – et qualitatifsur le plan de l’évolution de carrière et de la for-mation.”

Le danger d’une entreprise virtuelle“A moins de se transformer en entreprise vir-tuelle, la conception du produit, la gestion de lamarque, le marketing et le relationnel clients, neme semblent pas pouvoir être totalement exter-nalisés”, souligne Bertrand Quélin. Ce qui nedevrait pas empêcher le mouvement versl’externalisation de croître : d’une part, parceque les activités “support” dans l’entrepriseauront toujours plus de mal à répondre auxcritères de productivité des groupes. Recalés,elles sont conduites automatiquement à êtreexternalisées. D’autre part, l’externalisation devrait êtrerenforcée par la mondialisation de groupesqui ont déjà confié à certains pays (Inde, Europe centrale) certaines prestations, com-me la création de programmes informa-tiques. Sans oublier un élément importantd’accélération du processus : l’inévitable mimétisme d’entreprise. ■

300milliards de dollars, dont la moitié en Europe, c’est l’estimation du marché mondialde l’externalisation. (Source : Les Echos du mercredi 29 août 2001)

70%, c’est le taux de recours à l’externalisation pour les grandes entreprises françaises

en 2001, pour une moyenne de services externalisé de 2,2 et un taux de satisfaction de 90 %.

31%des grandes entreprises citent en 2001 la flexibilité comme raison pour externaliser

de nouvelles fonctions. Ce taux était de 9 % en 1999.

34%des grandes entreprises souhaitent externaliser de nouvelles fonctions dans les

deux années à venir, et seulement 6 % en envisagent l’arrêt. (Source pour les trois derniers chif fres : troisième baromètre Outsourcing d’Ander,sen).

PEUT-ON TOUT EXTERNALISER ?Tableau comparatif en termes de demande et tendances

LES CHIFFRES CLÉS

UNE EXTERNALISATION DIFFÉRENTE SELON LE TYPE D’ENTREPRISEFonctions externalisées en 2001

Entreprise Grandes entreprisesdu nouveau marché

Informatique et télécommunication 26 63Distribution, logistique, transport 33 52Services généraux 15 37Production 22 21Ressources humaine 56 20Administration ou finances 19 14Le marketing ou la commercialisation 9 17

Source : troisième baromètre Outsourcing d’Andersen.

PRESTATIONS CLASSIQUES EXTERNALISATIONDE SERVICES

Production-Transformation ■■■ ! ■■

Ressources humaines ■■■■ ! ■

Immobilier ■ !! ■

Optimisation financière ■

Marketing & publicité ■■■ ! ■

Recherche & Développement ■ !! ■

Comptabilité & audit ■■■ ! ■

Marketing téléphonique ■■■■ !!

Relations clients, SAV et CRM ■■■■ ! ■■

Informatique ■■■■■ !!! ■

Services transports & logistiques ■■■■ !!! ■

Gardiennage/Jardinage ■■ ! ■■

Surveillance ■■ ! ■■

Accueil ■■ ! ■■

■ = Niveau d’intensité de la demande des entreprises clientes

! = Tendance de la croissance

58 The European Business Review March - April 2012

Why Luxury Should not DelocalizeA critique of a growing tendency

By Jean-Noël Kapferer

Many famous luxury brands have recently planned to delocalize their production. Many applaud luxury brands for closing production sites in their home

countries, considering such cost optimization to be a ratio-nal evolution. But others claim that in doing so, luxury is losing its soul. This article reminds managers that any deci-sion must be analyzed and evaluated within the context of a strategy. Luxury is a subjective concept but a luxury strate-gy is not: luxury’s ability to sustain its high prices and prof-itability is governed by strict rules. What Prada and others are doing is, in reality, discontinuing their luxury strategy, in favor of a fashion strategy, without acknowledging this explic-itly. In fact, the luxury strategy is a specific business model. Fashion is another, governed by a completely different set of working principles.

From a well kept secret to overt announcementConversations with executives at high-end labels have long confirmed the rumor of rising levels of production outsourc-ing. But high-end labels always refused to acknowledge these rumors officially. A product’s country of production was often hidden by making the tag that specifies this information rather invisible on or in the product. For instance, it is very difficult to find any indication of the country of production within a

Lancel bag. The same is true for many Repetto shoes. Kenzo, a LVMH brand, moved the production of some clothes from Prouvy, France to Krakow, Poland, where workers’ wages were one fifth of those paid in France (Korosylov, 2007). Nevertheless, the clothes were still priced as high as before. Armani Exchange cardigans are made in Egypt and Tunisia. In fact, the success of Dana Thomas’s book (2007) is largely due to his journalistic work that unveiled the luxury sector’s taboo about production delocalization.

Coach, however, has never hidden the fact that a large part of its production is delocalized. The same is true for Ralph Lauren Polo. More recently, Burberry’s turn-around has been accompanied by the closure of its historical factory in Treorchy, Wales on the basis that having due to a belief that producing their clothes made in the UK was does not really createing perceived value for a fashion brand. Hence, starting

Many applaud luxury brands for closing production sites in their home countries, considering such cost optimization to be a rational evolution. But others claim that in doing so, luxury is losing its soul.

Strategy

www.europeanbusinessreview.com 59

in 2006, Burberry delocalized all but its trench coat to China, Mexico, and other countries with low labor costs. In 2011, Prada, a very high-end fashion label, has decided not only to manufacture outside Italy (in China in fact), but also to an-nounce this change publicly. This new communication strategy is most signifi-cant of a new era. Thus far, many Italian brands have used and abused the right to use the tag "made in Italy" as long as the product -although manufactured else-where- was « finalized » in Italy. Thus, the étiquette "made in Italy" does not at all guarantee that the product is actually made in Italy.

What then motivated the public an-nouncement by Prada that "About 20 percent of Prada's collections — which range from bags and shoes to clothes for men and women — are made in China" (reported in the Wall Street Journal June 24th 2011)? This must be understood within Prada’s financial context. It was pressed to seduce Asian investors, a few days before its IPO in Hong Kong on June 27, 2011.

Now, the real question remains: should luxury brands delocalize or not? Answering this question requires one to clarify what is meant by luxury.

Luxury : do not confuse the con-cept, the sector, and the business modelEveryone implicitly understands what luxury is, when one talks about the concept. Certainly no two persons have the same definition of what is their own luxury, but the shared concept of luxury refers to "rare, hedonic, very high quality objects and services, sold at a price far beyond what their functional value would command, source of self reward and of image lift vis à vis some relevant others"

(Kapferer, 1998). In fact, as shown by G. Bataille (1991), it is by sacrificing a high sum of money to pay more than

the functional benefits are worth that the buyer demonstrates his/her status and reinforces his/her own self concept.

However, the word "luxury" also has a second meaning. It can be used to refer to an economic sector. When Bain & Co. value the world luxury market at around 1.7 billion euros, they perform this calcu-lation by summing the revenues of com-panies regarded as luxury, not by the public at large, but by syndicated organi-zations. For instance, in France, Comité Colbert acts like a self-appointed Club: only those allowed to register in this Club are regarded as luxury companies.

There is also a third meaning of the word "luxury". It can be used to refer to a unique business model, a specific strate-gy with exacting and stringent rules to be followed (Kapferer, Bastien, 2009). This latter acceptance is interesting, because any company may enact a luxury strat-egy, even if this company is totally outside the common understanding of the kind of companies that comprise the luxury sector (fragrance, clothing, leather, watches, jewelry, accessories…). For instance, Apple, MINI, Nespresso, and even Lacoste follow, more or less, a luxury strategy, even though these com-panies are not perceived as "luxurious" by the general public.

The fact that "luxury" can have each of these three meanings is a source of much confusion. Since the word "luxury" is fashionable, its use is largely abused, especially by companies that do not in fact follow the rules of the luxury

The shared concept of luxury refers to "rare, hedonic, very high quality objects and services, sold at a price far beyond what their functional value would command, source of self reward and of image lift vis à vis some relevant others."

strategy. Coach, for instance, introduces its home page with a bold headline, "The look of luxury," thereby acknowledg-ing that, although it has an appearance of luxury, it is not a real luxury product. Going one step further, one can say that it is because luxury is a sector, driven by obligations of growth and profitability, that many of its co-opted members have no other choice than to delocalize their production. They rationalize it by in-voking the excellent quality of the work now done in China, but the real reason for this delocalization is that they cannot grow and increase their profitability by raising their retail prices. Instead, they are increasing their profitability by re-ducing their cost of goods. In the luxury business model, one grows by contin-uously raising the average price. This is the only way for a brand to keep on being the dream of the wealthy and of all those consumers who, although not as wealthy, want to buy a part of the for-mer’s life style. But this business model is exacting. Many companies cannot follow it anymore and prefer to discontinue a luxury strategy, without saying it explic-itly, in favor of another business model, for instance that of fashion or that of premium brands.

Luxury brand building is about building incomparabilityThe luxury business model aims at cre-ating incomparability, which grants freedom to set one’s own prices. In con-trast, in all other business models, prices are set while taking the competition’s prices into account.

How does one create incomparability and the price insensitivity that follows? Incomparability is created by moving away from tangible elements of compar-ison and focusing on concepts such as art and religion - intangibles that elevate people.

Certainly, incomparability should also

Since the word "luxury" is fashionable, its use is largely abused, especially by companies that do not in fact follow the rules of the luxury strategy.

60 The European Business Review March - April 2012

have a rational basis. Luxury brands put forth their rare ingre-dients, rare production, the unique talents of the brand’s crafts-men, the time it takes one person to sew a Kelly bag, or the time a Royal Salute whisky stays in the barrel (21 years minimum). But the economics of singularities (Karpik and Scott, 2010) that apply to famous Bordeaux Chateaux wines as well as to Management Consultancy prices are mostly due to the unique-ness and desire created by intangibles. The two major intangi-bles are time and provenance. That date of birth, heritage, and legend are one essence of luxury is acknowledged by the re-lentless attempt by many recent brands to simulate it. Thus, Ralph Lauren is very successful in making everybody forget that it is a recently-invented life style brand (1968), the fruit of a business genius named Ralph Lifshitz. The whole atmosphere within Ralph Lauren’s flagship stores and the many black and white photographs on the walls are designed to create the il-lusion of a brand that already existed at the time of the Great Gatsby, Cary Grant, and the early Hollywood golden era. This halo of privileged life is leveraged to sell the Ralph Lauren Polo line at a premium price, even though much of it is made in China at low cost. Nevertheless, these products are sold in flag-ship stores that look like mansions in the hearts of the world’s capital cities.

Provenance is the second strong intangible pillar of luxury desire, for it builds uniqueness, mystery, magic, and non-com-parability, and adds cachet. One should not forget that luxury is the by-product of art. Gifts are an important part of the luxury market. This is remotely reminiscent of the exchange of objects of art between the Emperor of China and the Kings of France and Italy. Luxury was the ambassador of the country from which it came.

An exception to the rule of provenance is when the home-land is not linked to an added value, or to a specific perceived skill. This is why Chanel or Louis Vuitton watches are made in Switzerland, but in their own exclusive factory. They are not outsourced or made under license. Similarly, if Hermès wants to launch a new shawl in rare cashmere wool, it might rely on the unique skills of the craftsmen themselves living in Kashmir. It already has such arrangements with Touaregs of the Sahara desert, Indians in Brazil, and artisans of Madagascar. This agreements are not aimed at reducing costs, but rather at sus-taining some rare local arts and savoir-faire.

Do not confuse luxury, fashion, and premium busi-ness modelsLuxury is a subjective concept. Many of us may disagree when

interviewed about the perceived luxuriousness of a given brand. However, luxury as a business model has quite precise manage-rial implications. What are all the elements of the luxury busi-ness model? (see Kapferer & Basti en, 2009).

full control of the value chain•� full control of the retail experience•� highly selective distribution•� one-to-one relationship with clients at retail level•� high level of personalized services•� high level of craftsmanship•� exceptional level of quality•� no licenses•� no super-sales, no promotions•� developing brand awareness well beyond the core target •� always increasing average prices •� strong involvement with arts •� beware of celebrities•� This business model was empirically invented by those

luxury brands which today are icons of the world’s desire (Vuitton, Hermès, Chanel, Ferrari, etc..). These brands grow by continually launching higher products - higher in creativi-ty, quality, and price. Porsche’s turn around in the 1980s was achieved by the deletion of the many accessible lines (920, 924, 928). Remember, products are perceived as luxury specif-ically because some people cannot access them. Products for which this rule is not met should not be called luxury products, but rather premium stylish products, for instance, or designer brands, or mass-prestige.

Today, everyone can see the multiplication of accessible goods sold by so-called luxury brands. It is normal for a luxury brand to create an access door to its universe, to induce the consumers to trade-up (Silverstein, et al., 2008). The problem arises when the so-called luxury brand can only grow and be profitable by selling accessories, mostly licenses. It means that the brand has, in fact, discontinued the luxury business model, while continuing to leverage its halo of luxury image (inherit-ed from a past fame) to sell fashionable accessories, produced at low cost in some emerging country.

Let’s now turn to the fashion business model. It is totally different for one very good reason. What does fashion sell? Just being… fashionable. This simple insight commands the entire fashion production, distribution, and marketing strate-gy. After two or three months, today’s fashion won’t be fash-ionable anymore. As a result, the prices will need to be slashed so that the shops get rid of their inventory and can be ready to showcase the forthcoming collection. In order to main-tain high margins despite the necessity to engage in sales, fol-lowed by super sales in factory outlets, there is only one so-lution: to lower the cost of production as much as possible and try to sell at the highest possible prices at the beginning of the season. In any case, once a cloth is out of fashion it is not used anymore. It does not need lasting quality (unlike that of luxury since luxury is here to last). This is why Coach has always acknowledged being made in China. The goal is

Some outsource agreements are not aimed at reducing costs, but rather at sustaining some rare local arts and savoir-faire. One should not forget that luxury is the by-product of art.

Strategy

www.europeanbusinessreview.com 61

to maximize the gross margin, by manufacturing the prod-ucts at the lowest possible cost. This is normal. In the fashion business model, one lives in a fragile time: being fashionable does not last. Thus, the past, the heritage, and the legends are not important. Nor is the country of origin. However, the designer is, or the strong values held and promoted by the brand.

The premium business model is based on the manufacturing of best-in-class products, with an image of style. An example is the skincare sector, in which the ever-increasing claims of skin protection and rejuination made in the advertising of new creams and elixirs must legally be justified by scientific evi-dence. In this business model, time, heritage, and even prove-nance are not important. Proof is.

To summarize the argument, Muccia Prada recently said (WSJ, June 24th, 2011), "brands need to economise and look for manufacturing territories that offer the best deal, but to also weigh up the consumer response to a luxury brand’s source and place of origin." This is a clear statement, admitting that the Prada brand now defines its strategy according to consum-ers’ own trade-offs, just as a mass market brand. But, in fact, what do consumers think about this?

The consumer opinion on delocalizationAsia is the future of the luxury market, because of its booming economies. It is, therefore, interesting to look at recent research undertaken in the BRIC countries as well as in Japan, which was the former number one market for luxury and is still very high. In interviews with 1,500 luxury buyers in Japan in 2009, McKinsey asked whether they agreed with the following sen-tence: "I do not care whether luxury goods are made in low cost countries such as China, India, Vietnam, so long as they are genuinely from luxury brands." Only 14% agreed. This means that 86% of Japanese luxury buyers think that luxury brands should not delocalize to countries with low labor costs.

Ipsos, a global market research company, asked another question of luxury buyers in six so-called emerging countries in 2010: "A brand fits more with my idea of a luxury when it is made in my country vs in a western country." The answers ranged from 1 (my country) to 6 (it is a western brand) with in-termediate grades corresponding to mixed or in-between opin-ions. The average answers by country are as follows: Russia 6, South Korea 5.8, Brazil 5.4, China 5.4, Hong Kong 5.3, and India 3.8. Interestingly, in five cases out of six, luxury immedi-ately evokes a product from another country, and specifically from western countries (France, Italy, Germany for cars too).

One should not overlook the role of travel in the growth of the luxury market. In 2010, according to Bain & Co.8, total luxury sales inside all of China were smaller than total luxury sales in New York city alone. However, purchases made by Chinese travelling abroad represent as much as Chinese in-ternal market luxury sales. When they travel to Paris, for in-stance, they visit the Eiffel Tower and The Louvre Museum and then rush to Louis Vuitton’s flagship store on the Champs

Elysées. They will bring back a luxury gift from that famous brand, bought in the Parisian store (which increases the per-ceived value of the gift), like a trophy. They cannot imagine buying in Paris something that is in reality made next door to them, in China, by somebody like them.

Luxury is special. It is the highest form of consumption, in which all the sources of added value are mobilized to produce the desire of something that is not necessary, making it com-pulsory: both tangible and intangible added values. Behind the luxury brand there is the country cachet and culture. This is why on the basis of ethics as well as of the long-term sustain-ability of their price, luxury brands should not delocalize, and should remain that for which they are bought: the finest objects and services a country can produce, with the additional unique cachet of being "made in…".

Sustaining "made in" as a real brand Looking at luxury companies’s own attitudes, there is a clear segmentation, based on their brand positioning and business model. A first group (such as Louis Vuitton, Hermès, Chanel) emphasize quality and heritage as the main sources of their in-comparability. They are patriots. For them, a country of origin is a homeland, much like the soil in a vineyard – a miracle made of earth, nature, sun, rain, and sophisticated human labor, loaded with culture. For them, "made in…" tells a whole story, tying production to a long heritage.

A second group of companies emphasizes the creative style only, much inspired by the fashion business model. Thus Burberry CEO A. Ahrendts defended the company’s decision to close its British factory as follows: being made in the UK is not a strategic factor to build consumer preference for the brand, which is mostly based on fashion and British style, not on a specific British manufacturing know-how, unlike some French and Italian luxury brands.

As a result, for this group of companies, the question of "made in" is an empirical one: if there is no difference in the look and feel of the product, consumers’ satisfaction is then guaranteed in any case. Since it is less costly to manufacture in China, it rational to delocalize, from a managerial stand-point. They are advocates of the intangible economy, following M. Porter’s thesis on the competitive advantages of nations, in which the West would specialize in what it does best (cre-ativity, design, and marketing), leaving production to emerg-ing countries that will quickly learn how to match the quality level of former local producers of luxury brands. Taking Apple

Behind the luxury brand there is the coun-try cachet and culture. They are bought for being the finest objects and services a country can produce, with the additional unique cachet of being "made in…"

62 The European Business Review March - April 2012

as a benchmark, although almost everything in an iPhone is made either in China or in South Korea, a label on every box reminds consumers that the product was "designed by Apple in California." In this manner, the Cuppertino company harvests fame and profits by virtue of being the one who conceived and designed this wonder tool. Thus, this segment does not empha-size the phrase "made in," but rather "designed in" or "designed by brand X," or does not emphasize any such particular phrase at all. As one retailer has said, "when a consumer buys Chanel, he/she buys France in the meantime, so why add a tag on the cloth with ‘made in France' written on it? To do so would be superfluous."

This raises a question of the specificity of luxury manage-ment. First, delocalization diffuses the, thus far, unique country know-how, thereby destroying levers of added value. More structurally, delocalization provides these western brands with access to higher volumes of production, and hence the ability to capture fast-growing consumer demand in Asia, Russia, and Brazil, without limits. Implictly, this means that luxury is a business just like others, aimed at value creation and share-holder satisfaction (Kapferer, Tabatoni, 2011). We are very far from Hermès philosophy, epitomized by CEO Patrick Thomas: "When one of our products gets too successful, we stop it." This philosophy is surely not unrelated to the remarkable prof-itability of this luxury brand (its profit in 2010 was 27% of sales). The luxury dream is precisely based on the fact that it is another world, far from all the principles governing the success of global brands made everywhere in the world and selling just an image to as many people as possible: Nike, Adidas, and even Ralph Lauren, Hugo Boss, Tommy Hilfiger, Gant, etc… The latter are often called luxury, because the word "luxury" sells, but they are actually premium stylish brands, if words and business models are to mean something seriously.

The consequence of this latter vision is that "made in" must be defended. Otherwise, it will lose its value. A first conse-quence is legal. The bar must be set very high to allow the right to use the certication of origin ("made in"). Most importantly, defending the "made in" means that this phrase itself should be managed as a full brand, with both its tangible and intangible sources of added value.

The challenges of non delocalizationTo remain a true luxury brand, following the luxury business model, entails sticking to local production. This is not an easy task for many luxury brands. Those that comply must create the conditions that are necessary to sustain this production. This is why they often buy their local sub-contractants in case the latter go bankrupt, to be sure to keep alive a historical

know-how that might otherwise disappear. Another reason might be that the owners of these sub-contracting companies retire, but have no children willing to take their position. Thus, luxury brands play an institutional role in the sector by creating their own schools to encourage youth to enter these rare profes-sions, often unknown amongst most youth, yet very rewarding. Many other brands would have just thrown in the towel and delocalized, happy to find low cost labor in emerging coun-tries or even in Eastern Europe, thus providing a big bonus to the shareholders, since the retail price of the luxury product is exactly the same regardless of the country in which it is made. But are shareholders the managers of the luxury brands, as they are for most consumer goods or even mass prestige brands? Of course not. As long as they remain independant, non-listed, family companies, they have a long-term vision that precludes falling in the trap of short-term benefits. What is at stake is the ability for true luxury companies to remain so distinctive and the source of an exclusive, long-lasting desire.

About the author Jean-Noël Kapferer, Ph.D Kellogg Business School (Northwestern University, USA) is Professor at HEC Paris, Europe’s premier academic research center on Luxury. Worldly reputed expert on brand management, he holds the Pernod-Ricard Chair on the Management of Prestige Brands. With his co-author V. Bastien, former CEO of L. Vuitton, now too at HEC Paris, he has just published The Luxury Strategy, the very first book on the specificity of a luxury strategy, too often confused with premium, trading up or fashion strategies. He holds executive seminars on luxury strategy in the USA, China, Korea and Japan.

ReferencesBain and co., Luxury in 2011, Bain World Reports, Milano, 2011•� Bataille, G., & Hurley, R., •� The Accursed Share, Zone Publishing Company, 1991.Ipsos, World Luxury Tracking Survey, 2011, Paris•� Kapferer, J-N, « Why are we seduced by luxury brands », The Journal of •� Brand Management, 1998Kapferer, J-N, Bastien, V., •� The Luxury Strategy, Kogan Page, London and New York, 2009Kapferer, J-N, Tabatoni, O. « Is luxury really a Financial dream? »,•� Journal of Strategic Management Education, 7(4), 2011.Karpik, L., Scott, N., •� Valuing the Unique : the Economics of Singularities, Princeton University Press, 2010Korosylov, I., What the luxury profession thinks of country of origin? •� Research paper, 2007-01., ICN, University of Nancy 2, France.Mc Kinsey, Luxury in Japan, A Research Report, 2009•� Porter, M., •� The Competitive Advantage of Nations, Free Press, 1998Silverstein, M., Fiske, N., Butman, J., •� Trading Up, Portfolio Trade, 2008Thomas, D., •� Deluxe : How Luxury lost its luster, Penguin Books, 2007

To remain a true luxury brand, following the luxury business model, entails sticking to local production. This is not an easy task for many luxury brands. Those that comply must create the conditions that are necessary to sustain this production.

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787 Dreamliner teaches Boeing costly lesson on outsourcingThe airliner is billions of dollars over budget and about three years late. Much of the blame belongs to the companto suppliers around the nation and in foreign countries.

February 15, 2011 | Michael Hiltzik

The biggest mistake people make when talking about the outsourcing of U.S. jobs by U.S. companies is to treat it as a moral issue

Sure, it's immoral to abandon your loyal American workers in search of cheap labor overseas. But the real problem with outsourcthrough, is that it can wreck your business and cost you a bundle.

Case in point: Boeing Co. and its 787 Dreamliner.

The next-generation airliner is billions of dollars over budget and about three years late; the first paying passengers won't be boaSome of the delay stems from the plane's advances in design, engineering and material, which made it harder to build. A two-modidn't help.

But much of the blame belongs to the company's quantum leap in farming out the design and manufacture of crucial componentnation and in foreign countries such as Italy, Sweden, China, and South Korea. Boeing's dream was to save money. The reality is cheaper to keep a lot of this work in-house.

The 787 has more foreign-made content — 30% — than any other Boeing plane, according to the Society of Professional Engineethe union representing Boeing engineers. That compares with just over 5% in the company's workhorse 747 airliner.

Boeing's goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together moduleselsewhere as though from kits.

The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn't fit together. Some their output quotas, creating huge production logjams when critical parts weren't available in the necessary sequence.

Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave supplieand required them to create their own blueprints.

Some then farmed out their engineering to their own subcontractors, Mike Bair, the former head of the 787 program, said at a mWashington state in 2007. That further reduced Boeing's ability to supervise design and manufacture. At least one major supplieengineering department when it won its contract, according to an analysis of the 787 by the European consortium Airbus, Boeing

Boeing executives now admit that the company's aggressive outsourcing put it in partnership with suppliers that weren't up to threcognize that sending so much work abroad would demand more intensive management from the home plant, not less.

"We gave work to people that had never really done this kind of technology before, and then we didn't provide the oversight that the company's commercial aviation chief, told business students at Seattle University last month. "In hindsight, we spent a lot mthan we ever would have spent if we tried to keep many of the key technologies closer to Boeing. The pendulum swung too far."

Some critics trace Boeing's extreme appetite for outsourcing to the regimes of Harry Stonecipher and Alan Mulally.

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Stonecipher became Boeing's president and later chief executive after its 1997 merger with McDonnell- Douglas, where he had bethe commercial aviation group the following year and is now CEO of Ford. The merged company appeared to prize short-term prits engineering expertise, and began to view outsourcing too myopically as a cost-saving process.

That's not to say that outsourcing never makes sense — it's a good way to make use of the precision skills of specialty manufacturduplicate. But Boeing's experience shows that it's folly to think that every dollar spent on outsourcing means a cost savings on th

Boeing can't say it wasn't warned. As early as 2001, L.J. Hart-Smith, a Boeing senior technical fellow, produced a prescient analyoutsourcing would raise Boeing's costs and steer profits to its subcontractors.

Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable businessthe decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really inwould simply be bought out by Boeing.

What do you know? In 2009, Boeing spent about $1 billion in cash and credit to take over the underperforming fuselage manufacAircraft Industries, which had contributed to the years of delays.

"I didn't dream all this up," Hart-Smith, who is retired, told me from his home in his native Australia. "I'd lived it at Douglas Airc

As an engineer at McDonnell-Douglas' Long Beach plant, he said, he saw how extensive outsourcing of the DC-10 airliner allowedprofits but impoverished the prime manufacturer.

"I warned Boeing not to make the same mistake. Everybody there seemed to get the message, except top management."

The company's unions have also kept singing an anti-outsourcing chorale. "We've been raising these questions for five years," sayof the Boeing engineers' union. "How do you control the project, and how do you justify giving these major pieces of work to relasuppliers? There's no track record of being able to do this."

It would be easier to dismiss these concerns as those of unions trying to hold on to their jobs if they hadn't been validated by the themselves. A company spokeswoman told me that it's not giving up on outsourcing — "we're a global company," she says — but refinement of that business model." Yet Albaugh and other executives acknowledge that they've blundered.

"We didn't want to make the investment that needed to be made, and we asked our partners to make that investment," Albaugh taudience. The company now recognizes that "we need to know how to do every major system on the airplane better than our sup

One would have thought that the management of the world's leading aircraft manufacturer would know that going in, before hanof work to companies that couldn't turn out a Tab A that fit reliably into Slot A. On-the-job training for senior executives, it seem

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.cfacebook.com/hiltzik and follow @latimeshiltzik on Twitter.